Investors waiting for 5G to boost Xiaomi Corp’s fortunes might as well take their money elsewhere.
Founder and CEO Lei Jun told Bloomberg News late Jan 10 that he expects the advent of next-generation wireless to energise demand for its smartphones: "I think we are at the eve of 5G. I believe when 5G phones start to get popular, the overall demand from China will recover."
Buying into the 5G hype seems to be the fallback response for a technology-hardware industry otherwise bereft of ideas.
That Lei thinks 5G will boost demand says a few things about his company’s strategy.
First, it’s a statement of the obvious. Each generation of mobile-networking technology revives excitement because of the prospect of faster connections. The next should be quicker yet.
However, the step from 4G to 5G will be far less dramatic than 3G to 4G because it’s a technology that will primarily improve the connections not made by humans but things (aka IoT) – such as door bells and cars.
Second, it’ll be another year or so until the networks will be truly ready, and without such a rollout 5G phones are pointless. Working in Xiaomi’s favour is the fact that China is ahead of the curve. On Thursday, Minister of Industry and Information Technology Miao Wei said temporary licenses will be issued in selected cities, Caixin reported, citing his interview with state broadcaster CCTV.
Yet, as Miao said, only 20% of future 5G networks will be devoted to communication. The rest will service IoT devices. That’s not great news for smartphone makers betting on a 5G future.
Another revelation from Lei’s comments is the way he views smartphones. In a pre-IPO announcement, the executive pledged to cap the profit margin on hardware at 5% in order to provide low-cost devices for the masses. The real money would be made in Internet services. But as I wrote at the time, this was mere spin: Margins on devices are well short of that ceiling.
Lei talks about smartphones as if they’ll help Xiaomi climb out of a post-IPO slump, which has seen shares fall as much as 41%. That’s because he needs this to happen.
Xiaomi’s Internet business, the key narrative behind its IPO roadshow, is built around selling branded smartphones. Once those devices are in users’ hands, it can try to sell ads and other services.
This model makes it more like Facebook Inc than Apple Inc, and relies on a daisy chain of factors falling into line. If Xiaomi fails to keep its place in users’ hands then the whole Internet business model falls apart.
That makes a 5G-led smartphone boom crucial to Xiaomi, but also a matter of wishful thinking. – Bloomberg
(Tim Culpan is a Bloomberg Opinion columnist covering technology. He previously covered technology for Bloomberg News.)